Gas demand to soar for Canada's oil sands - report

Natural gas volumes needed to help the oil industry unlock Canada's vast oil sands are expected to nearly triple in the next decade, just as production is waning and prices are surging, the country's energy regulator said Thursday.

Canada, the biggest energy supplier to the United States, is projected to produce more than one million barrels a day of crude derived from Alberta's oil-laden sands this year, the National Energy Board said in a major report.

In just over a decade, oil sands output could hit 2.2 million bpd, nearly as much as the country's current overall oil production, said the study into prospects for the oil sands to 2015.

That could spell gas consumption of 1.4 billion to 1.6 billion cubic feet a day, or about 10 percent of Western Canada's output. Oil sands operations now consume 600 million cubic feet a day, or 4 percent of the total, the NEB said.

The regulator predicted gas output would be relatively flat at 16 billion to 17.5 billion cubic feet a day through about 2011 due to maturing fields.

That is a big factor behind analysts' predictions that North American prices will stay high through at least the end of the decade. Canadian wholesale prices are around C$7 a gigajoule, about double the level of just two years ago.

Hefty operating costs are a hurdle the industry is trying to clear as it develops an estimated C$60 billion ($44 billion) worth of oil sands projects in northeastern Alberta.

About C$20 billion has been spent on completed projects aimed at extracting Alberta's recoverable oil sands reserves, which are estimated at 175 billion barrels, a resource second in size only to Saudi Arabia's conventional crude deposits.

Developers like Suncor Energy Inc., Shell Canada Ltd. and Syncrude Canada Ltd. have also been hampered by huge cost overruns on new projects and expansions, as Alberta's labor market has strained amid a construction boom.

Those players mine oil sands in open pits, wring tar-like bitumen from the sands, then upgrade it into refinery-ready oil, which is shipped to Canadian and U.S. refineries.

However, the bulk of new project proposals involve pumping steam into the earth to loosen the bitumen, allowing it to flow to the surface in wells, a process called steam-assisted gravity drainage.

Natural gas accounts for as much as half the cost of producing bitumen using steam, the report said.

The board noted some industry players are banking on new technology to cut gas consumption. Nexen Inc. and OPTI Canada, for example, plan a bitumen gasification process for their proposed C$3 billion Long Lake, Alberta, project.

The board estimated operating costs for steam-assisted projects at C$8 to C$14 a barrel and for integrated mining and bitumen upgrading developments at C$12 to C$18 a barrel.

High oil prices and growing U.S. demand for secure oil supplies have been a major driver behind oil sands investments, and the industry is studying new markets for the oil.

Through 2008, as much as 500,000 bpd of new supply could flow to current market regions, like the U.S. Midwest and Rockies and Washington state, through pipeline expansions and tailoring crude quality to suit refineries that do not use oil sands-derived crude now, the report said.

New pipelines, including one proposed by Enbridge Inc. across the Rockies to the Pacific Coast, could allow as much as 400,000 bpd flow to California and Asia, the Energy Board said.

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